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April 15, 2010

Skin, financially and literally

Since today is April 15, there's been extra focus on the fact that about half of the population pays no federal income tax. Megan McArdle has a typically clear-headed post with thoughts on the ramifications of this observation, and the Oregonian has a guest editorial largely about my colleague (and Senate candidate) Jim Huffman's views on the subject. At the risk of oversimplifying, one might say that there is a fiscally conservative argument that, even with a progressive tax system, all taxpayers should have some stake in the system, such that tax increases are felt by everyone -- "skin" as it has been called. Otherwise, the argument goes, you could have a situation where a majority of people don't pay taxes but vote to increase them on the minority who do. (Of course, the situation is more complicated, because the working poor do pay Social Security and Medicare taxes, and possibly sales taxes, though not here in Oregon, since we have no sales tax.)

What strikes me as fascinating about this argument, with which I have some sympathy, is that it is usually rejected by progressives, who point out the aforementioned other taxes and the like. However, notice the similarity between the tax "skin" argument and the real "skin" argument about why we should have a draft. It's a commonprogressive argument that the professional all-volunteer military has been bad for deliberative process regarding the waging of war, because the human costs are borne by a small subset of the population (and often thought to be less affluent).

That's the same argument, basically, as the tax one! So it's interesting to me that there isn't complete alignment of views on the two issues. (I'm sure that some people are consistent on both points.) If we think that everyone should feel the pain when taxes are increased, then everyone should feel the pain when we go to war. Whether that means a draft, or some special "cost of fighting" tax (for which members of the armed forces would be exempt), we should all understand the cost of using military force.

Yet, it seems like we have the worst of all possible outcomes: a tax system in which not everyone has a stake, and a military in which not everyone sacrifices something.

Thanks for the comments. You can disagree with McArdle's conclusions, but I think she does note the distinction that Delong raises. She thinks that the other federal taxes, like Social Security and Medicare, are offset in large part by other tax credits for the poor.

First, a technical point -- your link to the "guest editorial" actually points to Ms. McArdle's article in The Atlantic.

This topic raises a lot of points/questions, so I'll try to be brief and just throw these out there:

* Major difference between tax burden and military service burden -- while in both cases decisions that may have an enormous impact on those burdens could be made by those who are not directly shouldering said burdens themselves, only one of the affected groups *volunteered* to place themselves in harm's way. The self-inflicted (or not) exposure to peril would thus seem to me to bear on the relative fairness (or unfairness) of the two situations.

* In a representative democracy such as we have, said representatives will be required occasionally to render judgements on topics in which they have no direct interest (or perhaps even understanding). As a general principle, should we require those who make such decisions to have "skin in the game" on each and every decision they make? That seems rather impractical. If that is *not* a requirement generally, why then should either tax policy or military policy be a "special case" of decision-making?

* Since the government pays the financial costs of war, and this funding comes more-or-less directly from income taxes, by ensuring that all citizens have "skin in the game" on the tax front you would by definition also ensure that all citizens have "skin in the game" on the war front as well.

* Given the above point, in fact as things stand now those affluent people who "progressives" are so concerned about not having to pay for the decision to go to war, are in fact paying for such decisions as they are ultimately paying the bills. In fact it is the non-military poor who really have no "skin in the game" with regard to war, not the middle-class and more affluent who are making such decisions (either directly or indirectly).

As for myself, I am decidedly *NOT* a "progressive". But I do believe both in tax fairness (by which I mean of course making sure that *everybody* contributes *something* to government) and in universal support for the military (either by direct personal service, or financial support via direct taxation).

BTW, I am unfamiliar with Ms. McArdle's previous writings so I can't speak to whether she is "typically" clear-headed. But the linked article does seem right on to me.

It is true that most everybody does contribute some federal taxes of one form or another.

Yet the payroll taxes that most everyone does pay are dedicated to fund very specific programs (and even so, are now insufficient for that purpose).

When was the last time any politician spoke seriously about raising FICA taxes? No, instead we hear about how in order to pay for the increased costs of government, we'll stick the wealthy with the bill through increased *income taxes* and maybe even cut taxes for the low and middle classes even more.

The broader point I believe is that when government wants more money in order to do whatever it is that government has decided it must do, the *additional* burden should somehow be spread across all citizens, not piled onto a select subset of the population. When we speak of "taxes going up", that should actually be *meaningful* to everybody. Likewise, of course, when we speak of "taxes going down" then everybody should share in that relief.

Interesting arguements. Unfortunately, the USA is slowly becoming a nation of "Haves" and "Have nots". And the number of "Have nots" is increasing to the point where they will eventually be making the decisions by votes for the "Haves". And it doesn't help a bit that the Democrat Party is leading the way toward this goal by ever increasing the handouts for the losers and lazy bums of society and promoting class warfare.

"At the risk of oversimplifying"
Its worse than that. You are knowingly lying. By ignoring deductions, credits, loopholes, capital gains, and sales tax and focusing only on FICA you ignore the vast majority of tax burden for the bottom 50%.

I'll provide an example. As an upper middle class earner who nets ~100K a year I defer $38,000 of my gross income via retirement deductions (403b, 457v, IRA). I also take exceedingly generous deductions and credits for a variety of other expenses and investments. My tax deferred retirement accounts currently earn $~68,000 a year tax free. I currently pay ~8% of my total income in FICA. Our tax code is
expressly designed to favour the wealthy. And then there is the fact that the more wealthy you are the easier it is to cheat. Only the wage slave gets a W2 and 1099.

"Professional all volunteer army"

IMO, the military is a massively corrupt welfare program. The vast majority of recruits join for economic reasons and would be far better served by getting a real job or seeking training/education. Some progressives want to eliminate the "professional" military because it is inefficient, corrupt, and siphons away taxpayer funds without providing societal benefit.

In an economy where a significant proportion of the population is making near or below an income level that is a generally-agreed-upon standard of living -- let's call it a "poverty line" -- and with a wide disparity in incomes, scraping "skin" off the people on the bottom end simply drives their income further down.

That's the problem with McArdle's thesis (although it's hardly original to her). If, for a principle you want to make everyone pay -- if you really want to squeeze poor people just to the right amount of dry before you let them scuttle back out of your sight -- then sure, go ahead. It's not as if serfdom's that far out of our historical experience that we couldn't retool it for the 21st century. That is the Randian ideal McArdle aspires to.

In fact it is the non-military poor who really have no "skin in the game" with regard to war...

Yeah, except for the part where they have to live in a society that keeps getting bankrupted by wars and gross military spending and ships money by the hundreds of billions overseas instead of spending it in the United States on failing infrastructure and economic development. If you're well-off you can evade all that by just hopping from gated community to gated community, but if you're "non-military poor" with "'no skin in the game'" you just have to live in East St. Louis or Baltimore or East LA and wait for all that money to trickle down from wherever.